Distant conflict, local impact: construction contract entitlements in the wake of the Iran conflict

Under most unamended standard form lump sum contracts (including those in the Australian Standard suite of contracts such as AS2124, AS4000, AS4300 and AS4902), the contract price is generally fixed at the date of contract, with the risk of cost escalation borne by the contractor. In these circumstances, unless a rise and fall or cost adjustment mechanism is expressly included in the drafting, pure market‑driven increases in input costs do not, of themselves, entitle the contractor to an increase in the contract price.  

If a rise and fall or cost adjustment mechanism is included in a fixed lump sum contract, it will typically operate by allowing the contract sum to be adjusted up or down to reflect changes in the cost of specified inputs (such as labour, materials or fuel) occurring after a defined base date. Adjustments are usually calculated in accordance with an agreed formula or indexation mechanism (for example, reference to published indices), rather than by reference to the contractor’s actual costs. Provided the contractual criteria are satisfied, the contractor will be entitled to an increase in the contract sum to the extent of the demonstrated escalation. 

Depending on the drafting, a contractor delayed in reaching Practical Completion by a force majeure event may be entitled to an extension of time and, in some cases, compensation for additional costs, although cost relief is far less common. Force majeure is not a free‑standing legal concept in Australian construction law and only operates where, and to the extent that, it is expressly defined in the contract. Many commonly used standard form contracts, including the Australian Standard forms, do not include a force majeure regime as a default position, meaning contractors cannot assume that overseas war or related disruption will automatically give rise to contractual relief for delay or delay costs. 

Where force majeure provisions are included (either by amendment or in other standard forms), they typically define a force majeure event as an event beyond the reasonable control of the party affected, often expressly including war, hostilities, invasion or acts of foreign enemies (and the term ‘force majeure’ may not be used at all). The critical task to determine any entitlement is to examine the contract’s time and cost provisions to identify whether war or war‑related events fall within the concepts of qualifying cause of delay or compensable cause (or the relevant contract’s equivalent), and on what conditions relief is available. Any entitlement will turn strictly on the words of the contract, and will usually be subject to strict notice, causation and claim requirements. A contractor may also need to demonstrate it has taken ‘all reasonable steps’ or ‘all proper steps’ or similar to prevent or minimise delay, as is the case with typical time-related entitlements. 

There are a number of foreseeable scenarios that may arise given the war in Iran which could cause a contractor delay, and which could be characterised as being due to ‘war’, thereby falling under a force majeure definition. These include:

• delays in importation of supply materials due to the war (eg due to extended transit time or congestion as cargo is rerouted away from affected regions); 

• fuel shortages caused by the war preventing equipment operation or shipping departures from China/Singapore; and

• actual physical damage to materials that have been purchased (eg by sunk/destroyed cargo shipping), requiring the repurchasing of materials.

If any of these events occur, (and if the contract includes ‘war’ as a qualifying cause of delay, whether used in the definition of ‘force majeure’ or not) the contractor will likely be entitled to an extension of time. As raised above, force majeure is typically a non-compensable event, meaning although the contractor may obtain an extension of time, it will not be entitled to delay costs. Though this should be considered by both parties carefully as it will depend on the terms of the particular contract. 

Generally, responsibility for the work under the contract under a standard lump sum construction contract will sit with a contractor until practical completion (or upon termination/takeover etc, if relevant). In those circumstances, it is unlikely that a contractor will have any entitlement in relation to loss or damage to elements of the works caused by the war in Iran. However, many contracts include specific carve outs to this position, including by way of ‘excepted risks’.  

Under an Australian Standard AS4300 contract for example, clause 16 provides that the principal will be liable for loss or damage to the work under the contract caused by an ‘Excepted Risk’ (the definition of which in clause 16.3 includes ‘war, invasion, act of foreign enemies, hostilities (whether war be declared or not)…’), even during the period where the care of the work sits with the contractor. Clause 16.2 also provides that if directed by the Superintendent to rectify that loss or damage to the work under the contract, such direction to rectify will be deemed to be a variation. 

If a contractor can show that the war in Iran caused loss or damage to the work under the contract, it may have entitlements under the contract. Where it is directed to rectify that loss or damage, it may be entitled to a variation, which will usually entitle the contractor to claim an extension of time to the extent it is delayed. Many contracts will not expressly entitle the contractor to delay costs for variations (some do), but parties should note that delay costs will likely be priced into the variation when agreed or determined by the terms of the contract, meaning the contractor will likely have an avenue for both time and cost in these circumstances.

So, what comprises loss or damage to ‘work under the contract’? The definition of ‘work under the Contract’ in Australian Standard contracts varies slightly but usually encompasses something along the lines of ‘work which the Contractor is or may be required to execute under the Contract and includes, variations, remedial work, Constructional Plant and Temporary Works’. (Other forms of contract will have different definitions, which will require a separate analysis to determine whether an equivalent avenue is available). 

We can see two ways in which the war in Iran could arguably cause loss or damage to the work under the contract:

1. Physical loss or damage to, or delay in supply of, materials being imported from the affected area: 

   The most foreseeable way the war in Iran may cause loss or damage to the work under the contract is through physical loss or damage to, or delay in supply of, materials being imported from the affected area. As a practical example, if a ship carrying materials to be incorporated into or otherwise used in the work were sunk due to the war, it could be characterised as physical loss or damage to work under the contract. To progress works, the Superintendent would probably have little option but to issue a direction to rectify the loss or damage which under unamended Australian Standard contracts would be a deemed variation (as contemplated by clause 16.2 and discussed above), which will generally provide the contractor an avenue to entitlements of time and cost (either to be agreed or otherwise valued in accordance with the terms of the contract).   

   As another example, if a ship carrying materials were simply delayed due to the war, it is a little less clear that this could be characterised as loss or damage to work under the contract. The law is not settled on whether delay alone (without physical damage) can constitute ‘loss or damage’; however, where delay is likely to have its own distinct contractual mechanism, a court would likely treat such events as time-based delay events to be dealt with by the delay mechanism, rather than loss or damage. 

    

2. Fuel being characterised as ‘Constructional Plant’ or ‘Temporary Works’:

   The definitions of the following concepts used in the definition of ‘work under the contract’ in the Australian Standard form contracts are broad:

‘Constructional Plant means appliances and things used in the execution of the work under the Contract but not forming part of the Works.’

‘Temporary Works means works used in the execution of the work under the Contract but not forming part of the Works.’

It is unlikely any contractor could successfully argue that an increase in the cost of fuel/materials or the loss of fuel could be Constructional Plant or Temporary Works. 

Many contracts will provide that if the contractor is delayed in reaching Practical Completion by an act or omission of the principal (or the superintendent) it will be entitled to claim an extension of time. Such a delay is often also an avenue for delay costs. For example, clause 36 of the unamended AS4300 provides that ‘where the Contractor has been granted an extension of time … for any delay or disruption caused by [the Principal or the Superintendent], the Principal shall pay to the Contractor such extra costs as are necessarily incurred by the Contractor by reason of the delay’.

However, Excepted Risks operate as a contractual allocation of risk for certain events, rather than as conduct or decision‑making attributable to the principal capable of constituting an ‘act or omission’. 

If the war in Iran prompts a change in a Legislative Requirement in Australia (eg economic sanctions, embargoes, or import controls), which necessitates a change to the Works, the contractor may be entitled to cost and time. Each relevant contract will of course need to be considered on its terms to determine the merit of a potential claim, and the contracts may include qualifications on the entitlement. For example, the contractor may need to demonstrate that the change came into effect after the date of the contract, that it could not reasonably have been anticipated at the date of contract, that it necessitated a material change to the Works, and that it actually delayed the contractor or caused it to incur more cost than otherwise would have been incurred.